Dollar rallies vs. yen, but falls vs. other rivals

Sterling rises after Bank of England rate cut

WilliamL. Watts

PolyaLesova

NEW YORK (MarketWatch) -- The U.S. dollar rallied against the Japanese yen, but fell against other major rivals Thursday, as surging U.S. stocks boosted investor sentiment.

The greenback was last up 2.7% a 91.69 Japanese yen after hitting an intraday high of 92.22 yen. The euro also surged 2.7% against the Japanese currency.

Gains on Wall Street were behind the slump in the yen, which typically seen as a safe-haven currency, while heavy euro/yen buying has helped euro/dollar to session highs, said analysts at Action Economics.

The euro erased its earlier losses and was last up 0.2% at $1.2861 after soaring to an intraday high of $1.2904.

U.S. stocks posted strong gains, with the Dow Jones Industrial Average
DJIA, +0.26%
rising 101 points, or 1.3%, to 8,057.

The dollar index
DXY, +0.55%
which measures the U.S. unit against a trade-weighted basket of six major currencies, was at 85.73, compared with 85.722 in North American trading late Wednesday.

Stocks rose despite downbeat employment data. In a new sign of the continued deterioration in the U.S. labor market, initial jobless claims rose 35,000 to a seasonally adjusted 626,000 in the week ended Jan. 31. This put the number at the highest level in 26 years. Read more.

The January employment report will be released on Friday, with economists currently expecting a loss of at least 500,000 for what would be the third consecutive month. In December, 524,000 nonfarm payroll jobs were lost, capping the worst year for U.S. job losses since 1945.

Sterling rallies

The British pound rallied against the dollar and the euro Thursday, after the Bank of England delivered a widely anticipated half-point cut in its key lending rate, while the European Central Bank kept rates on hold.

The Bank of England cut the official bank rate to 1% from 1.5%, setting another all-time low for the benchmark.

The British pound surged 1.7% to $1.4679 after hitting an intraday high of $1.4701. The pound was at $1.4463 in North American activity late Wednesday and near the $1.4500 level ahead of the rate decision.

The pound soared 1.3% against the euro.

"The pound is trading higher because the Bank of England and the U.K. are being rewarded for their aggressive monetary and fiscal stimulus," said Kathy Lien, director of currency research at GFT.

"The euro on the other hand is being punished for implementing sluggish monetary policy," Lien said in a note.

In a statement, the Bank of England said past rate cuts, which have taken the key rate down from 5% since October, coupled with fiscal stimulus measures would have a significant impact on activity.

Still, there remained a risk that inflation would undershoot the bank's 2% annual target, warranting Thursday's cut, the rate-setting Monetary Policy Committee said in a statement. See full story.

Sterling had edged higher in earlier activity after the Halifax house price index posted an unexpected rise, showing a 1.9% monthly bounce in January house prices and breaking a 10-month streak of declines.

Halifax downplayed the rebound, however, noting that while there were some very early signs the housing market may be stabilizing, the outlook for 2009 remained bleak. See full story.

ECB keeps rates on hold

A rate cut by the European Central Bank at its March meeting can't be ruled out, ECB President Jean-Claude Trichet said at a news conference Thursday, following the central bank's decision to leave its key lending rate unchanged at 2%.

"I don't exclude (that) we could cut rates" at the next meeting, he said. The March decision will depend on "facts and figures in line with ... our strategy," he said.

An interest rate at zero wouldn't be appropriate "at this stage," Trichet also said.

The decision by the Frankfurt-based ECB, which sets monetary policy for the 16-nation euro zone, was widely expected.

"By postponing rate cuts, Trichet is putting his credibility and reputation on the line," said Lien of GFT. "The ECB cannot stop cutting interest rates at this time especially as we continue to see very weak economic data."

Interest rates could fall as low as 1%, leading potentially to more weakness in the euro, she said.

Benjamin Reitzes, an economist at BMO Capital Markets, said that further easing will likely come in smaller increments.

"We expect the euro area data to weaken over the next month, prompting the ECB to cut rates 25 bps to 1.75% at the March meeting," he said.

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